The Hindu Business Line : Selling property to buy property

I PURCHASED a plot of land in a metro seven years ago. I would now like to sell the land. Can I retain the proceeds received on sale of land in a savings bank account or fixed deposit account till I purchase or construct a house or till I file my return in July 2006, whichever is earlier? What is the time limit within which investment must be made in the house property? Is it necessary for me to invest the amount immediately in a capital gains account scheme?

R. Purushothaman

Reply

You are probably referring to making a claim for exemption under Section 54F of the Act. Section 54F permits an exemption provided the following conditions are fulfilled:

The assessee is an individual or a HUF

The gain arises from the transfer of a long-term capital asset not being a residential house

The assessee does not within two years purchase or three years construct any residential house other than the new house

The assessee is not the owner of more than one residential house (other than the new asset) on the date of transfer of the original asset.

A new house should have been purchased one year before or two years after the date of transfer or should be constructed and the construction should be completed within three years from the date of transfer

The quantum exempt will be on the following basis:

If the amount invested is more than or equal to the net consideration then the entire capital gain

If the amount invested is less than the net consideration then the amount invested x capital gain/net consideration

The Section, however, requires that if the amount is not used for purchase or construction within the due date for filing the return of income for the relevant year in which the capital gains arises, the amount must be invested in a capital gains account scheme and the amount so invested would be treated as having been invested in the new asset. This amount in the capital gains account scheme must be used only for the purpose of purchase or construction of the residential house and any failure to do so will make the sum not so invested in the residential house, taxable in the year in which the period stipulated by the section expires. If your due date for filing the return of income is July 31, 2006, the investment in the residential house must be made before this date and a failure to do so will require you to invest the amount in the capital gains account scheme. Until the due date the sum received from sale of plot of land can be utilised in any manner and can also remain in a savings bank account or fixed deposit with the bank.

You may also note that you have an option of claiming exemption under Section 54EC provided you invest in specified bonds of Nabard, the National Highway Authority of India, SIDBI, Rural Electrification Corporation or the National Housing Bank. This investment should be made within six months from the date of transfer of the plot and the amount exempt will be equal to the amount invested in bonds. In this case, the question of investing in a capital gains account scheme will not arise.

Query

The Finance Act, 2004 amended the taxability of capital gains to provide that long-term capital gains on sale of shares will be exempt and that short-term capital gains on sale of shares will be taxed at 10 per cent if the sale is on or after October 1,2004. In this case, will it be possible for capital loss incurred before that date to be set off against capital gains earned after? Is there a requirement that the scrips, to enjoy this reduced rate of tax or exemption, should belong to BSE 500 Index? What will be the situation in case of buy-back of shares by a company?

S. Rengarajan

Reply

The exemption in respect of long-term capital gains under Section 10(38) will be available if:

The transaction of sale of such equity shares or units is entered into after the coming into force of securities transaction tax , that is, on or after October 1,2004.

Such transaction is chargeable to securities transaction tax, that is, where the sale is through a recognised stock exchange.

The rate of tax of 10 per cent in respect of short-term capital gains will also apply only if the above two conditions are satisfied.

If these conditions are satisfied and since long-term capital gains will be exempt, the question of set off of loss under the head capital gains incurred before October 1,2004 against such long-term gains earned on or after this date cannot arise. However, a capital loss incurred before this date can be set off against short-term capital gains earned on or after even though the tax rates are lower. For exemption under Section 10(38) or for the lower rate of tax in respect of short-term capital gains under Section 111A, there is no need that the share should be a constituent of the BSE 500 Index.

The exemption under Section 10(38) or the lower rate of tax under Section 111A will not apply in case of buy-back of shares since securities transaction tax will not be suffered at the time of sale in case of such buy back of shares by a company.

Query

In last week's column it was mentioned that deduction under Section 80C would be restricted to Rs 12,000 per child in respect of tuition fee and further that the deduction would not be available in respect of more than two children.

It is understood that there is no restriction of Rs 12,000 in respect of tuition fee per child. Is this correct?

Suresh

Reply

You are right in pointing out that there is no restriction in Section 80C that the deduction must be restricted to Rs 12,000 per child in respect of tuition fee.

The total deduction under Section 80C, however, cannot exceed Rs 1,00,000. The error in the reply is regretted and the columnist thanks the reader for pointing out the error.

(Mail your queries to taxtalk@thehindu.co.in or by post to `Tax Talk', Business Line, Kasturi Buildings, 859, Anna Salai, Chennai-600002.)

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